Western Coal changes thinking on threshold for securities class actions

Western Coal changes thinking on threshold for securities claims

On balance, it hasn’t been a great year for plaintiffs when it comes to securities class actions.

An important example of this would be the decision of Gould v. Western Coal Corp., a rare instance where an Ontario judge refused to grant leave to plaintiffs who were hoping to launch a class action based on civil remedies that are available through the province’s securities act.

“This case is unique because it’s one of those rare cases where the allegations actually have no support at all in the evidence,” said David Di Paolo, a partner in the Toronto office of Borden Ladner Gervais LLP, who represented one of the defendants.

Part XXIII.1 is a relatively new section of the Ontario Securities Act that enables plaintiffs to launch claims that allege secondary market misrepresentation. The Ontario government created the statutory tort after some earlier cases in which the province’s judges had refused to recognize secondary market misrepresentation as a common law cause of action.

To prevent nuisance suits, the act requires plaintiffs to obtain the leave of the court to use the statutory provisions. Plaintiffs must therefore appear before a judge and establish two things: that a claim is being brought in good faith; and that a claim has a reasonable possibility of success.

Getting such leave has been a fairly easy thing to do. The leading cases that have hashed out the leave process are generally seen to have set a fairly low threshold. Because leave must occur so early in the litigation, judges have found it logical to keep the threshold low, especially since the parties won’t have amassed a thick pile of evidence. All this changed with Western Coal, which seems to be the first time a judge has refused to grant leave because the plaintiffs haven’t been able to satisfy that reasonable possibility of success leg of the test.

“A couple of years ago, my view would have been that the leave test was not really living up to its initial promise. It wasn’t being used to effectively screen cases,” says Andrea Laing, a partner with Blake, Cassels & Graydon LLP in Toronto. “It may well be that Western Coal will make me rethink that a little bit.”

Perhaps. Mr. Di Paolo believes that Western Coal might be something of an outlier. “The threshold hasn’t changed. This is that rare case where the evidence is just so overwhelming that there’s no reasonable possibility that these defendants aren’t going to be able to succeed at trial.”

Still, the case has intrigued defence counsel in securities class actions. They’ve been looking for something that helps them counter the low threshold. Last year, an intriguing case from British Columbia raised hopes. In a case called Round v. MacDonald, Dettwiler and Associates Ltd., a B.C. judge looked at similar requirements for leave that appear in the B.C. Securities Act. Although the judge dismissed the Round case on some technical grounds, he wrote some obiter that offered an interesting analysis of how he would have approached the leave test under the B.C. legislation. In this view, the leave test does more than simply weed out frivolous, scandalous and vexatious claims. Rather, it requires some sort of a merits analysis that would consider evidence from either side.

Ontario judges haven’t followed Round, but the B.C. case does seem to have inspired a fresh look at Ontario’s leave test. Ontario judges still apply a low threshold, but they do so recognizing that there is some room for analysis based on the merits. The possibility of success need only be a “mere” possibility — but it is possible to defeat a leave application by demonstrating that a plaintiff’s case has basically no possibility of success. “The defendants are entitled to put a record before the court to establish that the plaintiff’s misrepresentation claim has no reasonable possibility of success,” wrote Mr. Justice George Strathy in Western Coal.

Jason Woycheshyn, Michael Eizenga and Eric Hoaken of Bennett Jones LLP summed up the case in a note to clients: “The decision in Gould confirms that the threshold for plaintiffs obtaining leave to pursue secondary market liability claims remains low; however, Justice Strathy’s carefully reasoned decision makes it clear that the leave test should be considered a meaningful hurdle for plaintiffs to surmount. In particular, the low threshold will not prevent the court from engaging in a robust evaluation of the evidence before it.”

What the defence in Western Coal was able to do was basically follow the road map that Judge Harris had sketched out in the Round case in B.C. They produced volumes and volumes of evidence — enough to convince the judge that the defendants had sufficient evidence to discredit the plaintiff’s allegations. “So that’s why I say it may be a bit of an outlier. In my experience, this is the rare case where there aren’t some shades of gray,” Mr. Di Paulo says. “But here, it was just slam dunk.”